Minimizing surprises despite Eurozone uncertainties

The Eurozone is at a pivotal crossroads and will likely emerge from the ongoing crisis looking quite different from the one we know today. Because the world is so interconnected, most companies will be affected in some way, regardless of how this crisis unfolds.

The Eurozone crisis has created risks—and new opportunities—so businesses must prepare to navigate the different outcomes that may unfold. The run-up to the spring Greek elections and EU Summit demonstrated how quickly scenarios once nearly unthinkable in the European debt crisis can become realistic. Political developments, economic news, and approaching debt redemptions can trigger fears of a sovereign debt default or a Eurozone exit that could materialize over the course of a weekend.

The Eurozone future: How the crisis could unfold in the near-term

Four Eurozone scenarios dominated by uncertainty and high volatility

s1. Successive phases of fiscal and monetary action hold the Eurozone together

s1. Successive phases of fiscal and monetary action hold the Eurozone together

Greece is compelled to leave the Eurozone and then suffers a sharp deterioration in its economy, a rapid depreciation of its new currency and an inflation spike. Monetary expansion, fiscal transfers, bank recapitalisation and further Eurozone integration stave off contagion and the rest of the eurozone stays intact. The loss of Greece has an impact on confidence leading to a contraction until slow growth returns in late 2013.

s4. More countries exit Eurozone and a new currency bloc forms

s4. More countries exit Eurozone and a new currency bloc forms

A Greek exit leads to economic gloom and recession. Popular uprisings and pressure from bond markets, core Eurozone countries and the IMF lead the remaining periphery countries to abandon the euro. A new, smaller and tightly regulated Franco-German led bloc benefits from capital inflow and a boom in domestic demand, but loses competitiveness. Excluded economies contract in the short-term and face an uncertain future.